2 ways to lose all your money in the stock market

The stock market is perhaps the best way to build wealth, but it can also be an easy place to lose money if you do things the wrong way. Specifically, letting emotions get the best of you or trying to get rich quick by day trading almost always result in big losses. Here's what you want to avoid, and some advice on how to actually get rich in the stock market.

Buy high and sell low

This may sound like a silly thing to say. After all, it's common knowledge that the central point of investing is to buy low and sell high.

In reality, however, that is done less often than you may think. Investors are human beings, and human beings are emotional creatures and tend to follow the herd. When the market is crashing and it seems there is no bottom in sight, too many people panic and sell at the worst possible time.

On the other hand, when stocks are going higher and higher and people see their friends making money, they throw all of their money into the market at the worst possible times. I've been guilty of this, too -- it's what led me to buy First Solar for more than $200 per share in 2008.

According to a report (link opens a PDF) by BlackRock, the average investor earned an annualized return of just 2.11% during the 20-year period from 1996 through 2015. During the same period, the S&P 500 averaged returns of 8.19%, and even bonds managed 5.34%. The emotions of greed and fear are a big reason. It's no wonder Warren Buffett feels the best possible investment for most people is to simply dollar-cost average into a S&P 500 index fund.

RELATED: The best places to live if you want to make a lot of money:

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The 20 best places to live in America if you want to make a lot of money

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The 20 best places to live in America if you want to make a lot of money

20. Santa Rosa, California

Population: 491,790

Median annual salary: $49,800

Overall rank on best places to live list: 62

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19. Chicago, Illinois

Population: 9,516,448

Median annual salary: $50,410

Overall rank on best places to live list: 90

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18. Portland, Oregon

Population: 2,288,796

Median annual salary: $50,710

Overall rank on best places to live list: 20

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17. Houston, Texas

Population: 6,204,141

Median annual salary: $50,830

Overall rank on best places to live list: 17

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16. Worcester, Massachusetts

Population: 924,722

Median annual salary: $51,330

Overall rank on best places to live list: 65

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15. Philadelphia, Pennsylvania

Population: 6,015,336

Median annual salary: $51,740

Overall rank on best places to live list: #82

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14. Sacramento, California

Population: 2,197,422

Median annual salary: $51,970

Overall rank on best places to live list: 68

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13. Minneapolis-St. Paul, Minnesota

Population: 3,424,786

Median annual salary: $52,080

Overall rank on best places to live list: 12

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12. Baltimore, Maryland

Population: 2,753,396

Median annual salary: $52,460

Overall rank on best places to live list: 67

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11. Los Angeles, California

Population: 18,241,809

Median annual salary: $53,000

Overall rank on best places to live list: #83

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10. San Diego, California

Population: 3,183,143

Median annual salary: $53,020

Overall rank on best places to live list: #16

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9. Denver, Colorado

Population: 2,651,392

Median annual salary: $53,060

Overall rank on best places to live list: 1

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8. New Haven, Connecticut

Population: 863,148

Median annual salary: $53,350

Overall rank on best places to live list: 88

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7. Hartford, Connecticut

Population: 1,215,159

Median annual salary: $55,580

Overall rank on best places to live list: #59

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6. Seattle, Washington

Population: 3,557,037

Median annual salary: $57,370

Overall rank on best places to live list: 7

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5. New York City, New York

Population: 20,799,260

Median annual salary: $59,060

Overall rank on best places to live list: 96

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4. Boston, Massachusetts

Population: 4,650,876

Median annual salary: $60,540

Overall rank on best places to live list: #30

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3. Washington, DC

Population: 5,863,608

Median annual salary: $64,930

Overall rank on best places to live list: 8

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2. San Francisco, California

Population: 4,466,251

Median annual salary: $64,990

Overall rank on best places to live list: 9

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1. San Jose, California

Population: 1,898,457

Median annual salary: $75,770

Overall rank on best places to live list: 10

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Day trade

I've said this before, but it's worth revisiting because it's such a common misconception that day-trading is the best way to make money in stocks, especially among new investors. Aside from the fact that most new investors don't understand nearly enough about how the markets work to effectively day trade, the mathematics of it simply aren't in your favor.

Let's say that you make a total of 20 round-trip (buying and selling) trades per trading day. With roughly 250 trading days in a year, that's 5,000 buying transactions and 5,000 selling transactions. At a $10 commission, this translates to $100,000 per year in commissions alone. To put this in perspective, your trades could actually generate $80,000 in gross profit for the year, and you'll still end up losing $20,000 – you'll need a six-figure trading profit just to break even.

How bad does day trading usually turn out, exactly? It's tough to quantify it with dollar figures, but the facts show that it's pretty difficult to make any money. One research report found that just 13% of day traders earn a net profit in any given year, and only 1% are consistently profitable.

Do yourself a favor and stick to buy-and-hold investing -- leave day-trading to professionals. Maintaining a portfolio of high-quality stocks is the most certain path to stock market wealth. You're not going to get rich tomorrow, but you won't go broke, either.

How to make tons of money in the stock market

In a nutshell, the most surefire way to make a ton of money in the market is to do the exact opposite of the things discussed here. Specifically:

1. Buy low and sell high. Buy consistently profitable and stable stocks now, and hold them for years into the future, and then sell at a much higher price. Don't try to time the market -- it's always a good time to buy for the long term.

2. Invest with a long-term mentality. Warren Buffett once said, "If you wouldn't own a stock for 10 years, don't even think about owning it for 10 minutes." Remind yourself of this principle every time you consider buying a stock.

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